You might want to build credit and enjoy rewards, but store cards tend to stick around and add an additional monthly payment.
“Would you like to save 20% on today’s purchase by signing up for our credit card?” Be ready to answer this question when you shop this holiday season because a sales associates is bound to offer you something similar. Saving on your purchase can be tempting, especially when you didn’t have to clip any coupons, spend a certain amount, or find an online code. But before you say yes, you need to know why stores are offering this deal, when you could benefit from the deal, and why you might want to avoid these sticky store cards.
So why do so many stores have credit card offers? Retail stores are losing sales revenue to online retailers, and many are turning to store cards to offset losses.¹ Everyday that a balance is carried on a credit card passed the grace period, interest accrues and adds to your debt—and the retailer’s profit. This means that these stores can offer you a discount because they know that they can make their money back through interest. In some cases the sales associates might be offered an incentive for each line of credit they open.
Store credit cards may save you money, but these savings are tied to rewards or discounts to that specific store. These might include extra discounts during sales or loyalty rewards. If you’re a frequent shopper at a certain store, then a store credit card might be a good choice for you. But you probably won’t know all the terms of the card when the sales associate asks. Instead of filling out a credit card application that day, go home, and research the other terms of the card.
If you aren’t aware of the terms and interest rate on a store card, signing up can get you into trouble. If you go shopping for a pair of pants, you probably have an idea of how much you can spend. When you agree to a store card at the checkout, you save a certain amount on the purchase, but it is charged to your new card. This can get you in trouble if you are not prepared for another monthly payment when your statement is due. If you carry over a balance month-to-month, you will accrue interest. If this continues the next month, you’ll continue paying interest. Since store cards tend to have higher interest rates, you may end up paying more than you saved on that first purchase².
Overall, store credit cards can be beneficial if the rewards are worth the terms. If you plan to pay off the balance each month, you might find that the discounts save you money in the long run. On the other hand, if you do find yourself in a position where you could use a line of credit for a major purchase, you should find a credit card with a lower interest rate than any store card. The lower the interest rate, the less money that you will have to pay back if you need to carry a balance month-to-month.
1McMillin, David. “Why Store Credit Cards Are (Almost) Never a Good Idea.”
²“Store Credit Cards Not Consumer’s Best Friend.” InCharge Debt Solutions, 24 July 2019, https://www.incharge.org/blog/store-credit-cards-not-consumers-best-friend/.
1McMillin, David. “Why Store Credit Cards Are (Almost) Never a Good Idea.”The Points Guy, The Points Guy, 30 Nov. 2018, https://thepointsguy.com/guide/steer-clear-store-credit-cards/.